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Manufacturing demand surges in October

U.S. factory orders posted a solid increase by 2.2 percent in October, the government reported Tuesday.
/ Source: The Associated Press

Orders to U.S. factories posted a solid increase in October, the government reported Tuesday, providing the latest evidence that the economy is rebounding from the Gulf Coast hurricanes and a spike in energy prices.

The Commerce Department said that demand for manufactured goods rose by 2.2 percent to a seasonally adjusted $399.8 billion in October, erasing a 1.4 percent September decline when demand was jolted by the hurricanes, a strike at aircraft giant Boeing and a jump in energy costs.

The October increase was in line with economists' expectations. Orders for durable goods, items expected to last three or more years, increased by 3.7 percent while demand for nondurable goods rose by 0.5 percent.

Productivity increases
In other news, the productivity of American workers shot up at an annual rate of 4.7 percent in the July-September quarter, the best showing in two years. The new report from the Labor Department represented a big upward revision from an initial estimate made a month ago that productivity was growing at a 4.1 percent rate in the third quarter.

The big jump in worker efficiency helped to push labor costs down by 1 percent at an annual rate in third quarter, double the 0.5 percent drop in unit labor costs that had originally been reported. The stronger productivity and falling labor costs should help ease fears at the Federal Reserve that overall inflation was on the verge of worsening because of rising wage pressures.

The 2.2 percent overall rise in durable goods was the best showing since a 2.9 percent jump in August. It showed that manufacturing, which was the hardest hit sector in the 2001 recession, is showing resilience in the face of rising energy costs and the devastation caused by hurricanes Katrina, Rita and Wilma, which caused widespread destruction along the Gulf Coast.

The 3.7 percent gain in orders for durable goods was even better than an initial estimate of a 3.4 percent increase made last week. The gain was led by a 142 percent rise in orders for military aircraft and parts and a 50.6 percent jump in orders for commercial aircraft.

The 4.7 percent rate of increase for productivity in the third quarter was sharply higher than the 2.1 percent increase for the April-June quarter. It was the best showing since a 9.6 percent surge in the third quarter of 2003.

The 1 percent drop in unit labor costs marked the second consecutive quarter that labor costs have fallen after three quarters of big increases that had raised worries that wage pressures were beginning to mount. Unit labor costs declined at a 1.2 percent rate in the second quarter.

The upward revision in productivity reflected the fact that the government last week revised upward overall economic growth for the third quarter to an annual rate of 4.3 percent. It had originally estimated that the gross domestic product was growing at a 3.8 percent rate in the third quarter.

The increased amount of output meant that workers had produced more per hour of work than originally estimated.

President George W. Bush, battling the lowest approval ratings of his presidency, is seeking to draw attention to a spate of recent indicators showing that the economy has regained its footing following the blows from the Gulf Coast hurricanes and a surge in energy prices.

In a North Carolina speech on Monday, Bush declared that "this economy is strong and the best days are yet to come for the American economy."

In addition to the rebound in factory orders and the upward revisions to GDP and productivity, the government on Friday reported that employment grew by a solid 215,000 in November, ending a two-month lull which had reflected sizable layoffs in New Orleans and other areas along the Gulf Coast.

Productivity is the key factor that determines whether living standards are improving. Gains in productivity allow companies to pay their workers higher salaries from their increased production without having to increase the price of the products they sell, which would fuel inflation.

The Fed is closely monitoring productivity and unit labor costs as it determines how fast it needs to boost interest rates to keep inflation from appearing.

Good gains in productivity and small increases in labor costs have allowed the central bank to boost interest rates at a gradual pace over the past 18 months.

Analysts are looking for two more quarter-point rate hikes in December and January, the final two meetings for Chairman Alan Greenspan. And they believe his designated successor, Ben Bernanke, will keep raising rates at least in the early months of his tenure.